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Tuesday, March 8, 2011

Limiting the Size of Banks in the US: Rhetoric vs. Reality in the Wake of the Financial Crisis

To put a matress under a falling giant pales in comparison to placing a sign on Wall Street, reading “No giants allowed.”

In April of 2010, President Obama gave a speech in New York City to counter what he called “the furious efforts of industry lobbyists” trying to weaken or kill new financial regulations that he claimed are needed to stave off a second Great Depression.  It is telling that the banks that contributed to the financial crisis of 2008 were trying to diminish any new regulation. The President wanted more consumer protections, limits on the size of banks and the risks they can take, reforms on executive compensation and greater transparency for controversial securities known as derivatives.  He maintained that each of these areas must be in any bill that he signs. In giving the speech with some of the banking titans in the audience, the President wanted to confront the financial industry more directly through a sharp speech. After castigating their “failure of responsibility” in recent years, he called on them to stop resisting tighter regulation through the army of lobbyists now staked out on Capitol Hill. The president’s address at Cooper Union in Lower Manhattan circled back to another speech he had given at the same location in March 2008 warning of financial manipulation, market bubbles and the concentration of economic power.

Analysis:

At the time of his speech, the President was supporting the bills coming out of the House and Senate, neither of which forestall or minimize market bubbles and reduce the concentration of economic power.  Regarding the latter, it is my understanding that nothing in either bill limits the the size of the big banks.  For the President to say that the bill reaching his desk must include something limiting the size of institutions in the US financial sector yet also say that he supports the bills coming out of Congress does not make sense as it involves a contradiction. On the eve of the President’s speech, Fox News pointed out that the President’s chief of staff had met behind closed doors with reps of Wall Street firms. The message was reportedly: we’ve got to trash you in public, but know that we will take care of you in private.  While Fox News was at the time certainly no friend of the President, the account would explain why the President would contradict himself concerning the size issue.   Given the inevitable lag of regulators amid the fast pace of innovation in product development on Wall Street, simply regulating existing products would not forestall another crisis; the concentration of private capital in the form of large banks must be reduced for “too big to fail” to be effectively mitigated.  Sadly, the President will probably get away with demanding limits on the banks’ size while signing bills that do not contain such language.  That he received just under a million dollars from Goldman Sachs in his Presidential campaign is just part of the story, for once elected the President was undoubtedly focused on 2012.  Recalling Andrew Jackson, who successfully took on the bank of the US by refusing to fund it in 1832, and Theodore Roosevelt, who supported the Sherman Anti-trust Act in 1911, I must admit to thinking that Barak Obama does not have their guts to take on the big guys. How many of us in the twenty-first century remember Jackson or Roosevelt?  We are more likely to make our current President the default from which we measure.  I submit that this is a mistake.  If we ignore or are ignorant of the strong points in our history, we cannot benefit from them and we are doomed to repeat the weak points.

Source: http://www.nytimes.com/2010/04/23/business/economy/23prexy.html?hp